Envision Capital Management is moving assets out of high yield and distressed bonds and parking proceeds into a larger cash position until rates move up. Marilyn Cohen, president and ceo who runs the $150 million portfolio, said she feels high yield is tremendously over-valued. Cohen previously allocated one-third, or $50 million, of the account to high yield. She has already cut that in half by selling off names across the board. The cash allocation, currently close to 15% of the portfolio, is earmarked to go back into high yield when the market gets more attractive, which for Cohen would be a minimum spread over Treasuries of 300 to 500 basis points for triple-C bonds. Currently, she's seeing only a 200 to 300 basis point spread.
Cohen declined to specify by how much more she will cut the position except to say she expects to get paid for the risk she's taking. She does not want to invest in high yield paper when what it is yielding is only incrementally more than investment grade. For example, she noted that Chattem Corp. came to market with 7% notes of '14, rated single-B minus, whereas Leucadia National Corp. issued paper in March rated triple-B minus which priced at 6.67% and is due in '13. She said the yield is not much better for a company with more problems.
In addition to building up cash, Cohen also said that new cash has been going into an existing munis allocation, which also accounts for one-third of the portfolio. The other third is in investment-grade corporates, which holds very short-term paper. Cohen said she does not want to buy any more auto names, stating that she is already full there. She recently bought the short term Computer Associates 6 3/8% of '05 bond and is a big advocate of JC Penny and recently bought the 6% notes of '06. She stated that the company is working to turn itself around, recently selling off its Eckerd drugstore chain.
The fund has a very short duration of 2.5 years, and Cohen says there is not a benchmark short enough for her to follow. The duration among high-yield paper is currently 1.5 years and 2.5 years for investment-grade corporates. Cohen said the reason for such a short duration is for protection against rising interest rates. Her accounts are retail investors with $500,000 to $35 million to invest.